Dear SaaStr: Is it Normal for Series A, B and C Investors to Buy Up Previous Seed Investor’s Equity?
Yes. It’s much more common today than in the past, if not quite as common as 2021 😉
Right now in fact, I have two portfolio companies doing Series B and C rounds where there is “secondary” for the earliest investors. Where the pre-seed investors can sell into the higher priced, later stage round.
Today, most Series A-B-C-D firms want to buy every share they can in any round they lead — and not split the round. Funds are larger, and they are also often investing a tiny bit later than they used to, and with commensurately larger checks.
In most of the investments I’ve done, if the round is oversubscribed, the new later stage investors try to buy out any earlier investors that are non-institutional and willing to sell.
In fact, if the round is hot enough, it can be hard to get enough of them to sell. By contrast, if the round isn’t super hot, there just won’t be enough demand.
The bottom line is any round these days that is bigger than say $20m or so, someone is probably going to want to buy out the earlier pre-seed investors if they can and the price and terms work out. Because whomever that investor is, most likely they want to deploy 20% or more capital than they can otherwise deploy into the round. And most likely someone else will want to get into the round that can’t.
Now this math really only works at later stage rounds. Few investors that invested at say a $6m seed round want to sell in a $20m Series A. But a $200m valuation Series B? Then it starts to get more attractive.
A related post here:
Dear SaaStr: How Common Is It For Founders To Get Some Liquidity in A Venture Round?
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Jason Lemkin, Khareem Sudlow
